Global Economies Flash Warning of Sharp Slowdown

The composite purchasing managers index for the U.S. economy—which measures activity in both the manufacturing and services sectors—was 45.0 in August, down from 47.7 in July. That marked the second consecutive month with a decline and was the lowest reading since May 2020, early in the pandemic. A reading below 50 indicates a contraction; a reading above that level indicates growth.

“Gathering clouds spread across the private sector as services new orders returned to contractionary territory, mirroring the subdued demand conditions seen at their manufacturing counterparts,” said

Siân Jones,

senior economist at S&P Global Market Intelligence.

The U.S. economy has contracted for two consecutive quarters, though job growth remains robust with unemployment matching a half-century low. Inflation remains near records despite a slight cooling of inflation in July with the Federal Reserve pursuing an aggressive rate-raising strategy to cool demand and slow price gains.

Europe business activity also declined for a second month in a row amid a renewed rise in energy prices over uncertainty about Russia’s willingness to maintain its already reduced supply of natural gas ahead of the heating season.

Russian state gas supplier Gazprom on Friday said it would shut down the Nord Stream natural-gas pipeline to Germany for three days of maintenance later in August. That sent gas prices up, spurred by worries over Europe’s ability to amass sufficient fuel supplies before winter.

S&P Global said its composite purchasing managers index for the eurozone fell to 49.2 in August from 49.9 in July, reaching an 18-month low. Manufacturing output fell for a third straight month, while the services sector narrowly avoided a contraction. Businesses in both sectors reported a decline in new orders, which points to weakness in the months to come, while factories reported a buildup in inventories as goods remained unsold.

“This glut of inventories suggests little prospect of an improvement in manufacturing production any time soon,” said

Andrew Harker,

an economist at S&P Global.

The

PMI

for Germany pointed to the sharpest decline in business activity since June 2020, while the measure for France pointed to the first decline in activity since the first wave of the pandemic.

The eurozone economy has been hit by the fallout from Russia’s February invasion of Ukraine as higher energy and food prices have weakened household spending power and threatened business profit margins. The largest military conflict on the continent in almost eight decades—and one of the longest—also has hit household and business confidence.

For now, however, the jump in inflation has yet to derail the eurozone’s recovery from the pandemic, which has been slower than in the U.S. partly because government restrictions were lifted later. The reopening of parts of the economy that had been fully or partly closed during much of 2021 led to an acceleration in economic growth during the three months through June, even as the U.S. economy contracted for a second straight quarter.

The PMI for U.S. service providers fell to 44.1 so far in August, from 47.3 in July. Businesses encountered more client hesitancy in placing new work, leading to a steep decline in new orders, S&P Global said.

U.S. service providers are raising prices more slowly than they have in 17 months as softer orders and more competition lead to pricing moderation. Input costs also have moderated for service providers, but wage, supplier, and transportation costs continue to weigh on businesses.

U.S. manufacturers’ output contracted for a second straight month as they faced softening demand and continued supply-chain issues, though manufacturers also registered the slowest rise in cost burdens since January 2021.

While a summer tourism season that is closer to the prepandemic norm could see the eurozone economy grow modestly in the three months through September, S&P’s survey pointed to a decline in activity in the tourism and recreation industry during August.

That suggests that the eurozone economy may already be in contraction, and economists doubt it will avoid that fate in the final months of the year as high energy prices take a bigger bite out of household budgets. The duration and severity of that contraction will depend on the scale of the hit to household spending, and whether energy rationing that would directly reduce factory output becomes necessary.

Economists at Barclays expect the eurozone economy to grow this quarter and then contract in the final three months of this year and the first quarter of 2023. But, in a note to clients, they said their forecast of a mild recession “increasingly looks too optimistic,” given uncertainties about the availability of natural gas.

S&P Global’s surveys indicated that private-sector activity in Japan and Australia also declined in August for the first time since a wave of new Covid-19 infections at the start of the year.

Write to Paul Hannon at paul.hannon@wsj.com and Gabriel T. Rubin at gabriel.rubin@wsj.com

Corrections & Amplifications
Economists at Barclays expect the eurozone economy to contract in the first quarter of 2023. An earlier version of this article incorrectly said they expected it to contract in the first quarter of 2022. (Corrected on Aug. 23)